States Cannot Tax Internet Phone Services According to This New Court Ruling

As more and more Americans use internet-based phone services — like Apple’s FaceTime, for example, or Facebook Messenger calls — states want the ability to tax and regulate them. But a new court decision just said they can’t.

The Eighth Circuit Court of Appeals’ decision for Charter v. Minnesota confirmed that states cannot regulate these services, also known as Voice over Internet Protocol (VoIP) services, simultaneously setting a legal precedent for the Federal Trade Commission (FTC) to regulate them instead.

The decision also suggests that the D.C. Circuit Court of Appeals will rule in favor of the Federal Communications Commission (FCC) regarding the repeal of net neutrality rules, despite California’s attempts to pass its own net neutrality legislation and other states’ lawsuits against the FCC over the repeal.

The ruling taps into a growing trend as more and more telecom companies explore internet-based services. Based on the 2017 reclassification of BIAS providers as “information services,” the FCC is giving more and more authority to the FTC for various internet-based services.

In thedecision, the appellate court affirmed the United States District Court for the District of Minnesota’s ruling that VoIPs are information services, and because of that, state regulation of Charter Advanced Services’ VoIPs is preempted by federal law.

Roslyn Layton, a visiting scholar focusing on telecommunications and the internet at the American Enterprise Institute (AEI), told InsideSources there was a similar case in Minnesota “eight or 10 years ago over the same thing,” but was struck down.

In Layton’s view, this is really a battle over whether the states have regulatory authority over the internet — including broadband and net neutrality issues.

“What’s behind it is the money,” she said. “The internet is about 10 percent of our economy, 9 percent of GDP. There are literally thousands of VoIP companies that can start at any day or time, picking whatever states they want to serve. In Minnesota’s case, this was opportunism.”

Layton thinks this case shows that courts will rule in the FCC’s favor regarding the repeal of net neutrality rules under Title II of the Telecommunications Act.

“I think it’s going to show there’s about 22 states suing the FCC for the repeal of the 2015 internet order. I think this is just showing how the courts are going to rule in that direction,” she said.

In 2015, the Obama administration’s Federal Communications Commission (FCC) switched the classification of broadband internet access service (BIAS) providers from “information services” to “telecommunications services” under Title II of the Telecommunications Act, allowing the FCC to regulate them. In 2017, the Trump administration’s FCC reclassified BIAS providers as “information services” under Title I, essentially handing over their authority to regulate those providers to the FTC.

Markham Erickson, chair of Steptoe’s Internet, Telecom, and Technology practice group, told InsideSources he doesn’t think the ruling will have “much impact on the FCC’s decision-making,” but said telecom companies that offer VoIP services are now in a “bizarre” situation where some of their services are regulated by the FCC, but VoIPs by the FTC.

“There’s nothing stopping the FTC from regulating internet phone service [now],” he said.